Question 1

In a "Dutch auction" for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.

Accepted Answer

This is an accurate description of a Dutch auction for new stock.

Question 2

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

Accepted Answer

Hedge funds are less highly regulated and have more flexibility with their investments compared to mutual funds. Additionally, hedge funds limit their investors to wealthier and more sophisticated individuals and institutions.

Question 3

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Accepted Answer

A publicly owned corporation is also known as a publicly traded company which means its shares are available to be bought and sold by the general public on a stock exchange.

Question 4

Primary markets are large and important, while secondary markets are smaller and less important.

Accepted Answer

This statement is false. Primary markets are important because they are where new securities are initially issued and sold to the public, while secondary markets are where those securities are traded among investors after the initial offering. Both primary and secondary markets play important roles in the functioning of financial markets.

Question 5

The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.

Accepted Answer

This statement is true. The over-the-counter market, also known as the OTC market, is a decentralized market where securities are traded over the counter rather than on major exchanges like the NYSE or NASDAQ. In the early days, brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer. However, today, most OTC trades are done electronically rather than in person.

Question 6

Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities and adding them to its inventory or selling from its inventory. The Nasdaq, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.

Accepted Answer

The statement is flipped. Trades on the NYSE operate as an auction market, while the Nasdaq operates as a dealer market.

Question 7

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.

Accepted Answer

This is a correct statement about how to calculate the rate of return on a stock and how to estimate stock market returns for a group of stocks, such as those in the S&P 500.

Question 8

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

Accepted Answer

This is an accurate description of how the return on the market (represented by the S&P 500) is calculated.

Question 9

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Accepted Answer

This is because a share of common stock represents actual ownership in a company, while an option to buy the stock represents a contract that gives the holder the right, but not the obligation, to buy or sell the stock at a predetermined price. Therefore, the value of the option is derived from the value of the underlying asset (the stock), making it a derivative.

Question 10

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

Accepted Answer

This is the formula for calculating the total return on a stock. It takes into account both the dividend income received and the change in the stock's price, and expresses it as a percentage of the stock's beginning-of-year price.

Question 11

Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.

Accepted Answer

This statement is true.

Question 12

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called the "return on the S&P Index," and it is often used as an indicator of the "return on the market."

Accepted Answer

The answer of Each stock's rate of return in a...

Question 13

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.

Accepted Answer

This statement correctly defines a financial intermediary and provides an example of one.

Question 14

If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.

Accepted Answer

A secondary market transaction occurs when investors trade securities with other investors, rather than buying them directly from the issuing company in a primary market transaction. In this case, buying 100 shares of Google from another investor through a broker would be considered a secondary market transaction.

Question 15

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.

Accepted Answer

Closely held stock refers to when a small number of individuals, often including members of management, own a large portion of a corporation's shares.

Question 16

The NYSE is defined as a "spot" market purely and simply because it has a physical location. The Nasdaq, on the other hand, is not a spot market because it has no one central location.

Accepted Answer

The statement is incorrect. The NYSE is not just a spot market because it has a physical location, but also because it involves the immediate exchange of securities for cash. The Nasdaq is also considered a spot market as it involves the immediate exchange of securities for cash, but it is a decentralized, electronic market with no physical location.

Question 17

If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the Nasdaq Index.

Accepted Answer

The Dow Jones Industrial Index, the S&P 500 Index, and the Nasdaq Index are all commonly used benchmarks for tracking the performance of the stock market and can provide information on historical rates of return.

Question 18

The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.

Accepted Answer

The term IPO actually stands for "initial public offering," which is the first time a company's stock is offered to the public for purchase.

Question 19

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.

Accepted Answer

The answer of The NYSE is defined as a "primary"...

Question 20

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the Nasdaq, where anyone can make transactions.

Accepted Answer

The statement is incorrect as private markets are those that are not open to the general public and only certain investors or members can participate, while public markets are open to anyone who wants to participate. The NYSE and Nasdaq are both examples of public markets where anyone can make transactions.

Quiz 2: Financial Markets